The Growth of Independent Skoda Business - Term Paper Example

Skoda Business Strategy Table of Contents 2. Executive Summary Skoda, the Czech auto giant has been borrowing harder in Europe to ensure that they have the right market for themselves. Slowly displacing some of the other manufacturers in the auto segment, the company capitalised on its reliability brand and combining well with Volkswagen ensured that the car they produced was really world class. The German giant invested hard money into the company in addition to providing technology to take Skoda to new heights. Since the car was very impressive, the company took a drastic advertisement package that would ensure people notice it. Though risky, the advertisement ensured that the company could gain grounds in countries like UK and Germany. The market picked up and so did profits. For the first time in Skoda history, the company had a wait list of customers in UK. The company registered continuing and ongoing growth in profits for the fifth year in a row. 3. Introduction The Auto industry in the world has been going through an excessive change in performance and growth. In the last decade, the rise of China and Asia as manufacturing hubs changed the course of the auto industry in the world. The market in China and India, seem to be picking up and the Chinese market which has only 2% of its population holding four wheelers is already the size of the Japanese market. This makes it an highly probable growth market in the future (Jianxi Luo 2005). With many of the European and American car manufacturers finding their market dwindling and having surplus capacities have been reducing their manpower. They need to look at fresh and growing markets like that of China and Asia. With only a few players controlling the car market of the world, players like Skoda who has been gaining ground in Europe and in Asia need to be watched. The rising market for Skoda and the increasing profitability of the company makes it a company worthy of analysis (Tulder RV & Ruigrok W Jun1997). Beating some of the seeded players in the European market is no easy task. But Skoda could do that successfully and looks forward to a major break in the profitability of the company in the current year. All this makes the company, the one that needs analysis of their policies and their strategies. This paper aims at analysing the company and its marketing strategy that has led it to the success that it is now facing. 4. Strategies of the Company Skoda was formed in the year 1894 in Czechoslovakia with the aim of making bicycles. Subsequently, they moved into manufacturing motor cycles and later cars, trucks and buses. During the early twentieth century, the company started producing agricultural and other farm equipments for the east European market. By now the cars of the company found their way to the markets in the Western Europe and there was quite some market for them in UK. But the UK market always had a joke about Skoda particularly the appearance of Skoda. Skoda did make inroads into the West European market and in America because of its ruggedness and reliability. Though technologically poor, the engine under its hood was powerful enough to keep running even in the worst conditions. That made the machine one of the most reliable ones in the market at that time. This saw the population of Skoda increasing in UK. After World War II, Skoda tied up with Volkswagen for technical collaboration. VW invested in the company and ensured that the basic design of the Skoda remained in the early days but soon replaced by the Volkswagen Design since the technology adopted by VW as superior. This brought another marketing strategy that had to break through the already crowded market in Western Europe and in USA as much as in the rest of the world (William Kimberley Jun 2001). The perception of Skoda as an ugly duckling was slowly changing but still persisted. 'Oh! It's a Skoda'. But then it was as usual thought to be efficient and reliable. Skoda now had to make use of some bold advertising and marketing strategy in order to corner its market in Europe. UK specifically was dominated and continuous to be dominated by the American Auto majors, viz., General Motors and Ford. Since Skoda was perceived as not so attractive a car, the advertisement took a bold decision to take that perception among the people head on. Two new cars of Skoda were to be launched in the nineties and the advertisement accepted the fact that the Skoda does not look good. And then they presented the car. Now this was a great risk that Skoda took to say that their car is not a great looking one. But since they were really good looking and were performing very well, the cars were a run away success immediately. For the first time in the history of Skoda, there was a waiting list for Skoda cars in UK. By 2005, Skoda was consistently on the top of the JD Power Customer Satisfaction Survey for three years or close to the top. This did not make Skoda number one in UK but it cornered 1% of the UK car market for itself (Prashant Malaviya & Swati Srivastava 2003). The strategy of Skoda can be summarised as below: 1. They lacked technological capability which their competitors in the Western Europe and Americas had. In order to set right this, Skoda chose Volkswagen after comparing them with Renault. This gave them the needed technological capability and the financial muscle to pull them along in competition with the rest of Europe. 2. Once the technological capability and the performance of the vehicle became comparable with their competitors, the company was bent on capitalising whatever image has been created. The image of Skoda in the minds of the people of UK for instance is that of reliability; at the same time, they also had a image that their product does not look pretty. If this has to be made use the next product should be equally or more reliable than the earlier products and may be much more attractive than the rest of the competition. 3. In order to line up this strategy, the company engaged an Italian designer of cars to provide a contemporary design that would set the hearts racing. This was then incorporated with one of the best floor designs in the market; that of Volkswagen Golf. Once this was done, the company also ensured that the best engine they could make was brought under its hood. All this together made one of the best cars to compete in the Western Europe. 4. While all this strategy that the company went through was important, they were but internal and were in the control of the company. Whereas, the rest of the job to be done was with respect to the market and the company had to take a risk if it were to become successful. The company launched a successful marketing campaign where they accepted their own failure to make beautiful cars earlier. But could show that the new car was definitely a show stopper. The campaign ushered in a new Skoda to the people of the world. 5. Skoda also worked on its logo and the structuring of its marketing strategy where in order to capitalise on their reliability syndrome, just said, 'simply clever'. This made the people realise that there is more to a car than just plain looks. Skoda did not sell the car for its looks though there were takers who were impressed by the Italian designer looks that the car possessed. It seemed to associate itself with the 'intelligence' of the owner and therefore, the car and its design picked up. And the car itself was a great performer, very reliable and rugged. This made the car one of the best in the Western markets. This strategy paid off for Skoda and in the mid sized car segment Skoda became a leader. The results are the best measure of any strategy. This strategy has paid off till now. 5. Analysis of the strategy 5.1 Porter's Five Forces As per Michael Porter, the Five Forces that affect the marketing of a product are (Johnson, J., Scholes, K. and Whittington, R. 2005: Ch.2): 1. Supplier Power 2. Buyer Power 3. Barriers to Entry 4. The Threat of Substitutes 5. Competition or Rivalry In case of Skoda, the suppliers to Skoda are mostly local and there are no major issues with the suppliers. However, the capability of the suppliers will depend on the design constraints brought up by Skoda itself. In the case of the Buyers, they are the best buyers that any automobile company might have. It is also true that Europe and UK are made up of people who have the largest buying power in the world next only to USA. Skoda was supported by the Government of Czechoslovakia and therefore, there was no major entry barrier from the government side. Major barriers included the technology learning and to some extent capital. This was clearly augmented by adding Volkswagen to the team and they could pump in capital as well as technology for the company to capitalise on. Skoda was known for its resilience and was considered very dependable. There was no substitute that was in the minds of the people immediately. However, there could be other companies which might be vying for the 'dependable' position in the people's mind. It was always thought as a value car and this position need to be exploited by the strategy adopted by Skoda. Competition was tough and they could build really beautiful looking cars. Skoda was already infamous for the cars not so glamorous looks. Therefore, the company had to recreate its own image in the eyes of the public. Competition in this regard was tough and had to be taken very seriously. The decisions taken by Skoda appears as if all these points have been considered by them and the strategy adopted to push the new set of products made with VW's collaboration was in line with this analysis. They placed the right kind of promotional advertisement to take care of the negative image about the looks of the car was concerned. However, they also ensured that they capitalised on their ruggedness and the reliability factor of the car. 5.2 Ansoff's Matrix Within every industry, the companies that are competing with one another are also related to one another. Some of the industry sectors are closely related whereas certain others are not so closely related. In line with the understanding that every industry is linked to the other by their performance, competition provided and the methods succeeded or failed. All this would add to the relationship between them. As Stefano Valvano and Davide Vannani (2005) say that there are a number of common characteristics between industries that bring in a certain coherence and relatedness between them. Ansoff's Matrix (Johnson, J., Scholes, K. and Whittington, R. 2005: Ch.2) helps in planning out the product to market relationship and whether to get into a new diversification exercise or stay with the existing work that is being done. Present New Present Market Penetration Product Development New Market Development Diversification Table 1: Ansoff's matrix On applying the Ansoff's matrix to the situation in Skoda, after the association of Skoda with Volkswagen, the company had to make certain had decisions. The existing market for the company was reasonably stable in Europe but not something that is growing. There was a technological lacuna in the company that was telling on their vehicles. This made the company to work out the tie up with VW to ensure that the existing customers would continue to be loyal customers for the company. By retaining the product as it stands, the existing customers might move out. The question of present in both the market and the product might not be fully applicable in this case. Therefore, New Product development needs to be done to retain the existing market. On the matrix it moves to the new-product Present-market square. The company was not planning any new diversification into a new industry or different affiliated products. However, the company wanted to move over from the poor man's car image to that of a different profile and more acceptable looks. This could come up by picking the new market segment in the same zone. To this extent an advertisement campaign has to be taken up and promoted to ensure that the image the company has stands altered. 5.3 Bowman's Strategy Clock Figure 3: Bowman's Strategy Clock Applying Bowman's strategy clock (Johnson, J., Scholes, K. and Whittington, R. 2005: Ch.2) concept to the situation, the analysis bears out the following points: 1. Skoda was perceived as a low priced model. They had a unique selling proposition in the form of reliability of the product which could be capitalised on the Perceived value of the product. The company was more at 3 in the clock since they were making out only a low price and there was a lack of technological prowess. 2. If Skoda has to move up in line, then there should be a focused differentiation in the product which can be brought in by ensuring that the cars are technically equal or better than the competitors at the same time providing a reliability that is the hallmark of Skoda. This differentiation will bring about the wanted fund flow. 5.4 The Future Strategy The company's future strategy will be based on the current financial and marketing strengths of the company and the future targets. The company has been consistently increasing their earnings and profits in the years 2000 to 2005. The company's basic values of the Skoda brand are: intelligence, attractiveness and dedication. Figure: 1 The company has a dominating presence in Eastern Europe. The growing markets are in the Western Europe, Asia and Americas. The company has picked up sales in both the markets and it became better in 2006. It is this region where the growth is expected much more in the coming years. Figure 2: Safety and Reliability The company's USP has been its reliability and the injury rate is a measure of the safety it offers. The graph above shows that the company has been bringing the injury rate down drastically and the safety factor to 2 from 6. With safety becoming predominantly a deciding factor in Western Europe, it is no wonder the company has gone all out for reducing the injury factor. Table 2: Profit and Loss for 2005. The company has shown a profit doubling in the years 2004 and 2005. The growth continues into the year 2006 as well. In order to reduce the cost of production with the increasing competition (Ellis, J., & Williams, D. 1993), the company moved one of its manufacturing plants to India. This should bring down some of the component costs for the company. In 2005, the company had operations in 90 countries and factories in five. By 2006, one more plant was added in Russia. The major strategic decisions will be to move into the growing markets of China and India and the Latin America. Skoda is addressing the niche markets more and more. And this would result in positioning the products focusing on this niche segment, namely, a good looking car priced optimally for the middle class and not necessarily looking cheap. This marketing strategy coupled with the middle class requirement of making rugged and reliable makes the combination almost unbeatable. In order to provide similar cars to the other segments of the market (Thompson, J. and Martin, F. 2005), typically, the markets made by the first time buyers of cars, the college students and the youth who would look for a product like that of the Roomster. For the richer people, the company positioned the Superb. Between them, the company aims at cornering the majority of the growing markets and also sacking out some of the existing players in the Western Europe. 6. Conclusion From the analysis, we could see that the company has positioned themselves in line with the theory. The decisions taken by Skoda seem to align well with the theory of marketing management and also suggest a similar strategy for breaking into the markets where the company was moving slowly. The positioning of the products for specific segments also ensured that the company could tap the market that is most strong in, the middle class and this is the group that also cares more for the USP of Skoda, namely, reliability. Whereas the richer class more stress on the appearance and looks of the car and does not mind spending for an ad hoc purchase if the car looks beautiful irrespective of its performance; Whereas, in the case of Skoda the company aimed at providing the best value for its customers so much so that the company was repeatedly rated in the top five best value cars in Europe. Skoda, simply Clever! 7. References 1. Ellis, J., & Williams, D. (1993) Corporate Strategy and Financial Analysis Pitman 2. Jianxi Lou (2005) The Growth of Independent Chinese Automotive Companies, International Motor Vehicle Program, MIT, available at: http://imvp.mit.edu/downloads/The%20Growth%20of%20Independent%20Chinese%20Automotive%20Companies-05.06.pdf 3. Johnson, J., Scholes, K. and Whittington, R. (2005) Exploring Corporate Strategy 7th ed. Harlow, Prentice Hall 4. Prashant Malaviya & Swati Srivastava (2003) Rebuilding Skoda, INSEAD Case Study, INSEAD Knowledge. 5. Skoda Auto Annual Report - 2006, available at: http://ws.skoda-auto.com/download/4all/AnnualReport/2006/skodaauto_annualrep_2006_en.pdf 6. Skoda Auto Annual Report - 2005, available at: http://ws.skoda-auto.com/download/4all/annualreport/2005/skodaauto_annualrep_2005_en.pdf 7. Stefano Valvano & Davide Vannoni. (2005) Diversification Strategies and Corporate Coherence. Evidence from Leading Italian Firms. Available at: http://web.econ.unito.it/vannoni/docs/rio.doc 8. Thompson, J. and Martin, F. (2005) Strategic Management: Awareness and Change (5th Edition) Harlow, Prentice Hall 9. Tulder RV & Ruigrok W (Jun1997) European Cross National Production Networks in the Auto Industry: How Eastern Europe is Becoming the Low End of European Car Complexes, Berkeley Roundtable on the International Economy, available at: http://www.ciaonet.org/conf/bri01/bri01eb.html 10. William Kimberley (Jun 2001) Skoda: An Eastern European Success - history of the auto company - Statistical Data Included, Automative Manufacturing & Production, available at: http://www.findarticles.com/p/articles/mi_m0FWH/is_6_113/ai_76445145 11. Read More